The Glencore effect

The big dig

The increasing heft of mining firms is a challenge for fund managers

ON MAY 4th Glencore, a Swiss-based commodities trader, published the prospectus for its initial public offering (IPO). The firm, which holds stakes in other mining outfits, hopes to raise $10 billion (£6.1 billion) by selling a chunk of its equity, making it London's biggest-ever offering.

Nothing lifts the City's spirits quite like a big IPO. The lion's share of the $435m in costs will go to advisers, lawyers, accountants and the 23 banks underwriting and selling the listing. The prospect of Glencore using its new share currency to buy other mining companies makes the dealmakers giddier still. The City's fund managers, however, might have less reason to cheer.

Big mining and oil firms, such as Anglo American, BHP Billiton, BP and Shell have long listed in Britain, which has become the destination of choice for newer firms seeking capital. London's market has a strong brand, its rules are well understood, and there is money sloshing around. The City's big banks live off the fees. But for those whose performance is judged against that of the stockmarket, the commodity fetish is a mixed blessing.

Miners and oil firms already account for some 30% of the FTSE all-share index, twice their weight in the index of global stocks (see chart). Glencore is big enough to qualify for fast-track inclusion in the FTSE index of the 100 largest firms. This hefty weighting makes it tough for fund managers to neglect mining stocks, wary though some of them are of the commodities boom, lest their portfolios trail the overall market. Low-cost funds that mechanically track the FTSE indices have no choice but to buy into a big IPO, whatever its merits.

The upshot is that British-based investors are heavily exposed to a volatile industry. One worry is that the age-old commodity cycle—prices rise; firms invest in costly new capacity; supply increases; profits collapse—is more powerful than the burgeoning demand for raw materials in places such as China. Oil and mining firms carry extra risk for investors because they often operate in politically unstable or inhospitable places. “It is not like investing in Tesco,” notes one sceptical fund manager.

The tilt towards miners may work against the interests of other businesses. Technology companies complain that British investors do not value firms with high-growth potential, so wedded are they to more established business models. Tracker funds have to find money to buy IPOs and so sell other stocks, which might leave the latter open to takeover. A similar gripe is that the FTSE is no longer a bellwether for the British economy, because it is full of firms whose main operations are abroad.

In fact, this is a strength. The stockmarket's international bent means British portfolios are not limited to firms that do most of their business in the slow-growing local economy. And some of the anxiety about mining stocks is merely a pretext to preach the merits of actively managed funds, with higher fees. As for the rest, one solution might be for more managers to agree with investors on a global-equity index as a benchmark. But until such mandates are universal, Britain's savers must hope that the boom in commodity stocks lasts.